The Hut Group Ltd v Nobahar-Cookson & Anor

A contractual time limit triggered by awareness of a claim begins when the relevant person knows that the claim has a proper basis, where that meaning follows from the clause read in its commercial context. Damages for breach of warranty in a share sale ordinarily compare the value of the shares as warranted with their actual value at the date of contract.

Subsequent events may be considered only where necessary to uphold the compensatory principle. They cannot deprive a purchaser of risks and rewards allocated by a completed transaction. Whether an employee’s fraud is attributed to a company for a contractual fraud exception depends on the clause’s construction, purpose and commercial context. Attribution may arise where the employee produced essential financial information for the transaction, despite having no outward-facing role.

The claimant acquired an online sports-nutrition company from the defendants under a share purchase agreement. The consideration comprised cash and shares in the claimant. Each side alleged that financial warranties given by the other were inaccurate.

The claimant sought damages for defects in the acquired company’s management accounts. The defendants disputed the alleged adjustments and relied on contractual notification requirements. The trustee counterclaimed for admitted breaches of warranties concerning the claimant’s accounts, which had been falsified through an accounting fraud. It also advanced an alternative claim in deceit.

The principal issues concerned the validity of the claimant’s notices, the proper financial adjustments and valuation, the assessment of damages for the trustee’s counterclaim, the attribution of an employee’s fraud for the contractual liability cap, and the constituent elements of deceit.

1. Both breach of warranty claims succeeded, while the deceit claim failed. The claimant recovered £4,317,089. The trustee recovered £10,800,000, without application of the contractual cap.

2. The contractual notification period began when the relevant officers became aware that there was a proper basis for a warranty claim. Awareness of the underlying accounting facts alone was insufficient in the context of the clause. The claimant acquired the necessary awareness when its forensic accountants advised that specified items might provide reasonable grounds for a claim. Its notices were therefore timely. The notices also gave reasonable detail and all practicable early quantification. They were not invalid merely because the eventual valuation methodology and multiplier were supplied later.

3. The claimant proved most of its proposed stock and customer-loyalty-point adjustments. It failed on the proposed overseas VAT adjustment. Its attempt to reduce the agreed EBITDA multiplier was rejected because the expert justification was unpersuasive and had materially changed during trial. The agreed multiplier of 10.7 produced damages of £4,317,089.

4. Damages for the admitted breaches of warranties concerning the claimant’s shares were the difference between their value as warranted and their actual value at the contract date. Later commercial success did not reduce that loss. The transaction allocated the risks and rewards of subsequent performance to the trustee. Taking later events into account was not necessary to give effect to the compensatory principle discussed in The Golden Victory [2007] 2 AC 353. Applying the accepted discounted cash-flow approach and the court’s findings on IPO probability and discount rate, the loss was £10,800,000.

5. The liability cap did not apply. Attribution of fraud depended on the construction and commercial purpose of the contractual exception for claims resulting from the buyer’s fraud. The financial controller was heavily involved because he produced financial information essential to the acquisition and fraudulently prepared figures that caused the warranty breaches. His lack of an outward-facing role was irrelevant. In the surrounding circumstances, his fraud was attributable to the claimant.

6. The allegation that the finance director personally participated in the fraud was not distinctly proved. The deceit claim also failed. The trustee had relied upon the contractual warranties, rather than the alleged pre-contractual EBITDA representation. It did not prove either reliance on the alleged audit representation or that the finance director made that representation knowing or suspecting it to be false.

The proceedings were commenced in the High Court on 17 October 2012. No appellate history is stated in the judgment.